Home buyers turn to riskier loans as interest rates soar

Consumer advocates warn that home buyers could find themselves in a precarious financial position as they look for ways to cope with higher interest rates.

FILE - A "SOLD" sign decorates the lawn of a new house in Pearl, Miss., on Sept. 23, 2021. Homeowner equity climbed to record highs in the first half of 2022, though its rate of growth is slowing as the housing market cools. (AP Photo/Rogelio V. Solis, File) (Rogelio V. Solis, Copyright 2021. The Associated Press. All rights reserved)

HOUSTON – Home buyers feeling financially squeezed by higher interest rates are increasingly being steered by real estate agents and mortgage brokers to potentially riskier types of mortgages, similar to those seen ahead of the 2008 financial crisis, causing concern among some consumer advocates and industry analysts.

Among the loans being promoted to home buyers are adjustable rate mortgages, so-called 2-1 buydowns, which artificially lower rates for the first two years, and interest-only mortgages in which borrowers pay a lower monthly payment for several years by only paying the loan interest, according to interviews with real estate professionals, industry data and a review of marketing material from real estate agents and mortgage brokers.

In all instances, borrowers can find themselves with monthly payments that increase by hundreds of dollars a month after the introductory period, a dynamic seen in the run-up to the last housing market crash when predatory lending resulted in millions of borrowers losing their homes, and forcing some major financial institutions out of business.

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